Laverty: Car tax rules hurt fiscally responsible RI cities, townsDecember 26th, 2011 at 6:00 am by Ted Nesi under Nesi's Notes, On the Main Site
By Patrick Laverty
If there is one point that Cumberland Mayor Dan McKee tries to get across in an interview, it’s that he’s just looking for fairness. It’s an issue that he’s been trying to get across to the General Assembly for some time now. We’ve heard in recent years about the fair-funding formulas for our cities and towns, but a major problem exists: the towns have differing reimbursement rates. And McKee feels those rates are not “fair.”
In 1998, the General Assembly passed a law that would phase out the motor vehicle excise tax over seven years, meaning Rhode Islanders would no longer be paying taxes on automobiles by 2005.
In 2002, the economy was turned upside down and the Assembly extended the length of the phase-out. A few years later, it was suspended indefinitely. Since then, most of us have felt the pain of more recent legislation that cut the exemption in many towns from $6,000 to $500.
That cut in the minimum exemption means fewer dollars for cities and towns, because they “are paid by the state for the lost taxes due to the exemptions” [pdf]. When state officials reduced the amount they will pay the cities and towns, the municipalities lost a great deal of revenue.
Why did the General Assembly do this? The answer is simple and has never been denied: to balance the state budget.
As much as some may disagree with balancing the state’s budget using local money, let’s deem that acceptable for now. But are the towns even being reimbursed fairly and equally? When you look at the numbers, it would appear not.
Let’s start with a basic explanation of how this works. The “exemption” is the amount of your automobile’s value that doesn’t get taxed. Originally, the exemption was $6,000. Last year, it was dropped to $500. That means in one year a car worth $6,000 went from being completely exempt from taxation to being taxed on $5,500 in value.
Using Cumberland numbers, here’s an example of how the exemption and state reimbursement works:
Automobile value: $20,000
Taxable value: $14,000
Tax rate: $19.87 per $1,000 of taxable value
In Cumberland, the car tax bill would be $19.87 x 14 = $278.18, so until last year, the owner of the car would be charged a tax of $278.18.
The state would then give each town the money not charged because of the exemption. In this case, there was $6,000 in value not taxed, so multiplied by the $19.87 rate means Cumberland would receive an additional $119.22 from the state for that vehicle.
When lawmakers lowered the exemption it reimburses from $6,000 to $500 last year, the state’s part of that equation dropped significantly. Instead of getting $19.87 for $6,000, it was for $500. The town would now receive $9.94 for that vehicle instead of $119.22 – a drop of 92%.
This is the part that wasn’t done fairly. Looking at the charts below, we can see communities with a similar amount of exempted value. But we see differences in how much the state paid each town for the exempted value:
Remember, the amount reimbursed from the state is supposed to be based on the amount of exempted value. The list above shows Cumberland had the most exempted value yet received the lowest reimbursement from the state. That’s not exactly what you’d call “fair.”
This isn’t just an issue in that price range. Looking at the bigger cities, we see the same discrepancy:
Again we see cities with a higher exempted value receiving less in reimbursement. Why would this be? Possibly it’s because of the tax rates set by the cities themselves – many towns raised their car tax rates before state lawmakers froze them in 1998.
The same car is being taxed at a rate of $76.78 in Providence but only $19.87 in Cumberland. The towns that tried to be fiscally prudent in 1998 are the ones now receiving less in reimbursement money. But the rules have kept changing in the years since the original auto tax freeze in 1998. One could conclude that if they had the chance to do it all over again, many towns would go for the highest rate possible. At that point, the state might as well have set a standard rate for all towns. Instead, the state is rewarding the behavior of the cities who decided to raise their car taxes to ridiculously high rates and not be as fiscally responsible to their taxpayers.
So what do towns like Cumberland get for trying to be fiscally prudent in the past? They get shortchanged in the present. We hear about the need for “belt tightening” at the local level. If the state was serious about that, they’d make changes to the reimbursement system and they’d reward the towns who tightened their belts long ago. In a word, they’d be fair.
Patrick Laverty is a computer programmer and a contributor to the blog Anchor Rising.
Ted Nesi will return on Wednesday, Dec. 28.